Thursday,18 July 2024

A closer look at how DBS measures its digital journey

5 min read

Interviewed By TAB RadioFinance

Chng Sok Hui, chief financial officer of DBS, shares about the bank's journey in mapping its digital transformation value and how it permeates within the organisation.

  • Chng Sok Hui explained the key 2017 financial numbers for DBS from a digital transformation perspective 
  • The bank truly believes in the future being digital and is investing in capabilities and functionalities that bring innovative solutions to customers
  • Sok Hui believes that digital medium is a channel through which banks can know their customer behaviour from a granular perspective

Emmanuel Daniel (ED): Thank you for going through your numbers with us. The sense I want to get is: 1) I want to get some clarifications on your balance sheet, and 2) You’re probably one of the first banks in the world starting to describe your business in digital terms and describe your balance sheet in digital terms, so I want to take stock of what you actually say, how far you’re going, and how the numbers themselves will start to evolve.

Just for a point of clarification, can I just clarify that for your fee-based income; the figure we have is a 22% fee as a % of total. Is that correct, or should it be 30-something? That sounds a bit too low for a commercial bank.

For a bank that is increasingly digital and a bank that has a very vibrant corporate finance capital market business, shouldn’t that be closer to 30%?

Chng Sok Hui (CS):    The fee income number excludes treasury products. If a bank didn’t manufacture treasury products and instead sourced it from third parties, you would put it under fee income. In our case, because we manufacture quite a large part of our treasury products in-house, the accounting standard says you have to put it into other income unless you can bifurcate it into customer income component, which would then be recorded as fees, and a manufacturing income component, which would be recorded as other income. If you can’t, then the whole amount goes into other income.

So, there’s a large component of our IBG and CBG customer income amounting to $1 billion that’s actually shown under other income. It’s like sales income from our treasury products are all under other non-interest income. So, if you compare banks, they have no in-house capability, and they take from third parties and white-label the products to sell. Then, they will have fee income.

ED:      So, you have two incomes. You have a fee, and you have a production income.

CS:      So, say in Su Shan’s world, we have the fee income. She has a wealth management fee line where she sells unit trusts and third party products that are not produced in-house. So, those are all fee income, but there is a portion of income that is generated by T&M creating those products. They could be equity-linked products. They could be credit-linked products. Those are all shown under other non-interest income. So, total customer income of about $1 billion is shown under other non-interest income, so that’s why you add that to fee income to be comparable.

ED:      You add that in.

CS:      Yeah, it would be 30%. It would be more aligned to what you have been looking at.

ED:      Okay. So, from a health-check point of view, you are in line as a commercial bank. The thing is that, in fact, the more digital you go, the theory I’m working on is that the more fee-generating capability that you’d have, and you’d be less dependent on your organic NIM products. So, 30-something, if you include that, tells the story quite well.

Well, most banks have a deposit base that is not fully deployed, so that means the loans are less than deposits.

CS:      So, our loans-to-deposit ratio would be still 80 over %. In fact, we have quite a slack balance sheet, if you look at our performance summary. If I look at loans-to-deposit ratio, which is what I think you’re saying –

ED:      Yeah, that’s what I’m saying.

CS:      That’s about 85%.

ED:      Okay, got it.

CS:      Yeah, so if I look at the loans-to-deposit ratio, we are 86.5 % in our latest performance summary.

ED:      Do you think that your liabilities base can be better?

CS:      I think we have a very strong liabilities franchise. Of course, the key CASA component is in Singapore. That’s why we benefit hugely when rates rise. What we have been able to do over the years is to develop two other sources of income.  The Singapore CASA, which still maintains 52% market share, is significant. But we need US dollar deposits because that’s where the growth is happening, and that’s where the customer demand is.

So, Hong Kong, actually, has been very successful in growing their CASA. Today, Hong Kong’s CASA is 61% of the overall deposit base, and our cash management team, as well as private banking, has been growing the CASA deposits. So, if you look back at our track record of US dollars, I think you should find that our CASA balances have grown strongly, and that is actually something that we are quite proud of. The GTS (cash management) capability and the private banking capability. So today, when US dollar rates rise, Hong Kong benefits quite significantly from the US dollar and Hong Kong dollar deposit base.

ED:      You’re saying Hong Kong is in because the Hong Kong dollar is a proxy for the dollar?

CS:      We have both US dollars and Hong Kong dollars because that’s the natural deposit base in Hong Kong because their customers tend to think of US dollars and Hong Kong dollars as quite – because Hong Kong and US dollars tend to move in line as a peggedcurrency.

ED:      But is Hong Kong your source of US dollars at the moment?

CS:      It is one source, and I said the CASA is actually 61% of Hong Kong’s deposits. But the other big source of US dollar deposits is the cash management account as well as the private wealth account in Singapore.

I’ve been CFO for over nine years now. In the earlier stage, we were not very diversified. We were just havingdeposits. I think we now have a much stronger franchise because we’re now going to commercial papers, and that’s very helpful because sometimes deposits can be even more expensive compared to commercial papers. We went into medium term note financing. We went into covered bonds. We were the first to tell the MAS that covered bonds would actually be a good source of diversification. It lowers our cost of funds even compared to deposits.

So, over this period, we’ve diversified various sources of funds, so I would say we have a very healthy deposit franchise plus a lot of supplementary sources of liabilities.

ED:      So, is one of the values of having a private banking business as part of your overall –

CS:      GTS also, John Laurens’ cash management business. Since we have launched IDEAL, you’ll find that the cash management business – and we show the data in our performance summary – GTS is the biggest contributor to [the growth] of our institutional banking business.

ED:      Your GTS customer base is mostly Singapore corporates or –

CS:      No, it’s regional. So, a lot of the companies use us because we’re able to pool the cash balances from all their different locations and do that pooling for them.

ED:      So, your diversification in the liability space is good. Isn’t Hong Kong also a source for Renminbi or you?

CS:      When the Renminbi s appreciating, you find that the people in Hong Kong start accumulating Renminbi And then, when the currency started depreciating, people switched back. So, the currency play for CNH is also a function of exchange rates.

Siddharth Chandani (SC):      So, now you’ve got very similar offshore and onshore bond yields right?

CS:      Yeah.

SC:      Of course, you don’t have too much ofarbitrage?

CS:      That’s right.

ED:      You have an asset base in China, so your exposure that way – and this is not liquid or currency –

CS:      Yeah, look at our credit quality. It’s been very good. So, we are very selective in our China book; we stick to high-quality corporates that can service their debt. Among them are SOEs with sound balance sheets. SMEs and the retail are a very small part of our portfolio.

DBS’s methodology for measuring digital value creation

ED:      Okay. Now, let’s get to the digital. Your first definition of digital is more than 50 % of financial transactions with digital channels, or 50 % of non-financial.

CS:      Yes.

ED:      Is that being a little bit kind to yourself? 50% runs the risk of double-counting, meaning that your non-digital customers are also digital. So, 50 % means 50 % of transactions are digital and 50% are not. So, there are –

CS:      So we try to separate the noise from signal.

ED:      Why not 8 –

CS:      Noise and signal, right? We don’t count a lot of things that create noise. So, we don’t count giro transactions at all because everybody does giro, so we exclude, from this financial transaction count, all giro transactions. We exclude all ATM transactions because it’s not differentiating. It’s always been there, for a long time. We don’t count check deposits because everybody receives checks that they need to deposit at branches. So, we eliminate those that, to us, if you include, are all just noise.

Raghu Singh (RS):      Balance inquiries, for example.

CS:      We also exclude balance inquiries for retail customers. We only focus on those transactions where the customer actually is initiating the transaction. So, if he does a fund transfer through the Internet, if he does a bill payment through mobile, or he changes account details, those are the types of transactions that we capture.  And we re-qualify them as digital customers on a rolling basis, meaning that if they don’t meet the criteria, they get classified as a traditional customer in the next period. So, it’s a rolling 12-month concept. If you don’t make the criteria, you drop out of the digital customer segment.

So, you asked, “Why don’t you cut off at 80%?” We find it makes very little difference whether you use 50%, 60%, or 70%. We test that because what we don’t want is to go out to the market with a set of numbers and then find that, actually, the digital and traditional segments are flip-flopping. Today, they’re digital. Tomorrow, they’re traditional. We worked hard on making sure that our measurements produce signals that are real. And so, we did a lot of these tests, and we found that it makes no difference.

If we were to raise it to 75%, it also doesn’t make any difference: the digital customer stays digital. The numbers stay the same. If you look at the chart we posted, we said the digital customers do 16 times more transactions than the traditional customers in the consumer business.

BP:      Would it make sense to determine them by acquisition channels, like customers who are acquired in a digital manner?

CS:      So, there are three criteria for a digital customer. For the first criterion, they buy a product digitally, like they buy a unit trust, they buy travel insurance, they open a savings account, or they put in fixed deposits. Everything is done digitally. That is the first criterion. Or we send them an email to say that, “Oh, you are now a wealthcustomer,” and they accept it, and they upgrade themselves. They install the iWealth app. That is the first criterion.

The second criterion that we use is the financial transactions. They do more than 50 % of their transactions through digital channels, and that typically means funds transfers, bill payments, and those kinds of transactions.

And the third type is non-financial transactions, more than 50 % of which are also done digitally.  Such as setting up a new payee, change of address, change of email, change of phone number. All that, updating account details, those are non-financial transactions. A digital customer would do more than 50 % of all the total transactions on digital channels.

ED:      So, in your definition, what is a digital native, someone who’s entirely digital? Where would that come in? What is your definition of a digital native?

CS:      We use these three criteria to qualify someone as digital. While he may do certain transactions online, he still goes to the branch sometimes. If he receives a check, there’s nothing he can do. He has to go to a branch and deposit it. So, those are digital customers. And all income and expenses associated with the products he has, whether they are digital products or non-digital products, the whole package, this is our digital segment.

ED:      What is the goal that you’re getting to when you do the segmentation? What is the question that you want to have answered?

CS:      A lot of our analysts tell us they can’t attribute value because it’s a lot of noise, right?

ED:      Every bank is different.

CS:      Every bank’s different. So, the way we think about it is that we cut our revenue pie into three parts, and maybe I’ll just give you a quick refresh.

Foo Boon Ping (BP):  Today, they are mainly consumer and wealth customers, right?

RS:      Yeah, 40-something %.

CS:      We said we are going to adopt different strategies for the different segments of our customers. We call it unbundling the bank. This part, which we say is 44 % of the pie, is consumer banking and SME in Singapore and Hong Kong only. So, this portion is where we know it’s stable. It’s annuity income. And here, we are being disrupted. Alipay is here. Everybody is here. That’s the market share that they want. And here, our intention is to pre-empt disruptors, so we want to make sure our market share stays.

Then, we have a slice that’s very small, and that’s consumer and SME in growth markets. So, that’s about 4%. Now, this sliver (opportunity)is just India, Indonesia, China, and Taiwan, and today is not profitable. But we believe that we have a business model that will work. We launched digibank India. We launched digibank Indonesia. We launched a partnership with Tally, so for the SME side, they can open the account and do everything digitally. We expect that this segment will break even in a couple of years, and that it will contribute at least 10 % of our pie over time. It’s 4 % today. This is a revenue pie.

Then, we have the remaining pie that is a bit noisy. It’s very hard to model because it contains Institutional bank income, and Private Bank income, which tend to be market driven. Some years are better for Capital market activities or Treasury & Markets activities. Last year, T&M did very badly. So, this is the segment where there’s bit more noise.

BP:      GTS is under there as well?

CS:      GTS is a product group, so the income associated with the SME segment will be in the 44% pie where the SME business is. So, we said that it is very hard for the analyst to distil the underlying improvements in the cost-to-income ratio because it can move due to a lot of factors. So, we wanted to focus them on this 44% segment. We said, “You should be tracking how our cost-to-income is actually changing for this particular segment where there’s more annuity income.” And as customers switch from traditional to digital, you see the improvement in the overall cost-to-income ratio –

BP:      – of that segment. So, the paradox is that – a lot of the GTS business is very digital, very straight through, where there’s a lot of automation and –

CS:      And then, we unpeel this 44% segment of the pie into two segments - the digital segment and the traditional segment. And the whole idea is this: that within this annuity business of the consumer banking and SME in Singapore and Hong Kong, there are actually two segments. Those who exhibit the three behaviours that I said are under the digital segment. The rest are under the traditional.

And what has been happening is that customers are increasingly adopting digital behaviour. So, from 49% in 2015, such customers accounted for 60% of revenue in 2017. The other thing that is happening is that this digital segment is actually growing faster. It’s got an income CAGR growth of 23%, whereas the traditional is flat.
So, here on this chart, we’re trying to say that you have to unpeel it and get to the granularity that you’d be able to understand the underlying drivers better. So, the digital customers’ ROE is 27%, but the ROE for the traditional segment is 19%. The cost-to-income ratio in the digital customer segment is 34 % while it is 55% for the traditional segment, giving a blended 43% for the whole segment. When you do everything blended, you can’t see it.

So we will be showing, with our annual report – the finalised 2017 data.  We show first half annualised [on Digiday], so that people can follow the progress. We have now shown the market 2015 and 2016. We show first half 2017 annualised. We’ll be showing 2017, and we’ll keep updating this process. And the whole idea is that people and the analysts can see that, yes, this digital segment is growing. The pie is growing, and as this pie grows, the 44% will grow. The overall ROE will be a better ROE. The ROE improves, and the cost-to-income ratio comes down. So, that is why we embark on this methodology, to segregate the digital segment to explain the underlying drivers of ROE and cost to income ratio.

I’m sorry. It’s a long answer to your question. You asked why we bother to do this, and that is the reason, because, for this segment where it’s not so noisy, we are able to help analysts see the linkage to the bottom line. So, that’s a very long answer.

ED:      You need to use it more for yourself than for the analysts, actually.

CS:      We are already doing this.

ED:      If you’re on a journey to becoming digital, then what’s the end game of that journey? And that, by the way, is the most important question. It’s not so much how you present yourself to the analysts.

By the way, my measurement is also that we are beginning to assess banks on how digital they are. Digital for productivity doesn’t count for us because all you’re doing is industrialising what you already have using today’s technology. Digital for productivity in 1971 was about having ATMs. So, you measure how many ATMs you have. Therefore, you’re more digital than the other bank. Today, digital for productivity is if you have internet banking and everyone’s using mobile. Then, you’re digital for productivity. But that’s not transformational digital. So, the big thing I want to know is: What are you using these metrics for internally for transforming the bank?

Now, I have just another point of clarification. You actually clarified the cost-to-income ratio, by the way, so I won’t ask that question, but your institutional banking actually generates more profits than your consumer banking. They are almost par and par.

CS:      I think this year, with ANZ’s year of operation; I think it will be on par.

ED:      Yeah. So, in some ways, you’re benefiting from being the dominant bank in Singapore, with all the state-owned enterprises being your customers. It sort of subterfuges the digital story somewhat because what you’re saying is that a lot of your digital customers are re-consumers, and that’s where the transformation is taking place. But your income’s says that, number one, you have a very strong corporate banking business, which is not necessarily digital.

CS:      It is digital, but it’s hard to delineate corporate customers into digital and traditional segments. While they are transacting more with us digitally, their bespoke requirements mean that they require a fair amount of interaction with relationship managers, and I don’t have a metric to communicate.

ED:      I understand.

CS:      The digital strategy in this segment is to “digitise or profitability.” It’s just that it’s not amenable to the same metric we can use to demonstrate clearly the value of digital.

ED:      Okay. Next question: PayNow, for example, does that count for digital now? Are you taking that into account?

CS:      So, first of all, PayNow, or PayLah! is just one of the channels that you can use. So, do you actually buy a product? PayNow is not a product, but it will be transactional. So, did you use it to make payments? Whether you use PayLah!, PayNow, Internet, or mobile, you qualify to be a digital customer if more than 50% of your overall transactions are of that nature.

ED:      Okay. How do you map exactly what you just said on the infrastructure side? You have the product side, but you also are a legacy bank with a huge core banking system and so on. So, how much of that has been digitised for the customer, and how do you measure that against what you’re achieving with the customer?

CS:      So, that was covered in Dave’s presentation. So, Dave’s presentation –

ED:      That was from a financial point of view.

CS:      Yeah, so maybe I’ll try to summarise this. So, what we did –

ED:      What effects are we looking at?

CS:      From the slides, you see it took us four years to change our whole legacy architecture. We “Fix the basics” from 2009 to 2014, these were the foundational years.  A lot of banks have only done the front end. What we’re saying is that we’ve done the back end, and we did it during the period 2009 to 2014, and we built resiliency. We revamped the data centre. We started insourcing, and we built engineering bench strength. We have a security operations centre. We have a monitoring centre. So, to me, this is all basic infrastructures.

And then, to your question, in 2009 to 2014, when we first did it, our stack was all legacies. We said we wanted to sell. “Sell” means all these are not where we want them to be. The green ones were, “Yeah, we are where we want them to be,” and blue ones were “hold”

By 2014, we had fixed the basics, so this was the chart where we said everything was done, and we were then ready to build the digital bank. So, that was very key in 2014.

And you’ll find the red ones are in Hong Kong, where last year we moved to the same core banking system in Phase 2. There’s a Phase 3 this year. Core banking systems are very hard to do, but we’ve done it in Hong Kong. We successfully cut over.  And then, we did the ANZ integration. Taiwan needed a new cards system because we didn’t have a cardsbusiness in Taiwan. ANZ gave us half a million cards in Taiwan. They gave us half a million cards in Indonesia.

Prior to ANZ, we had VisionPLUS in Singapore and Hong Kong. We didn’t have one in Taiwan. We didn’t have one in Indonesia. And we didn’t want the same VisionPLUS that was already in Singapore and Hong Kong because it’s not cloud-native. So, again, for this, we really wanted to bring it to cloud-native as the next stage, so we rebuilt the whole VisionPLUS on cloud, working with the vendor. “You will be our first customer on cloud platform. Do you want to do it for your integration?” We said yes, and we cut over on the cloud. Cloud platforms are much, much cheaper. They’re a fraction of the traditional cost.

We successfully cut over for ANZ Taiwan and the half million cards are on the cloud platform. I don’t think there’s any other bank out there that’s got the VisionPLUS on cloud yet. And in Indonesia, we also successfully cut over one or two weeks ago, to the VisionPLUS cloud platform.

And they’re all done in-house because we also have the in-house Hyderabadcapability, and we have about 2,000 people there now. Previously, we used to outsource to software vendors like IBM, NCS. Now, we insource 80 %. So, we have our own tech people who have this capability.

So, the legacy stack has been tackled. That’s why we started building the new sort of capability. We wanted to be the D in GANDALF, and that was our next journey from 2014, when we looked at a number of these players. Again, these are the slides that Dave showed, how long they took to move to cloud. So, Google took four years, Amazon took six years, Netflix took seven years, and we actually started our journey later, but we learned from all of these, and we believed we could do in three and a half years.

So, today, the bulk of our systems are already on cloud. And then, we try to make sure that APIs can be linked through a middleware layer, and that’s why we think the technology part is very key. So, what I mentioned earlier, initially, in 2009, we were 85 % outsourced. Now, we are 85% insourced, so that again is a critical capability.

ED:      Let me ask you a third level of questions.

CS:      And before you move on, you wanted to see how tech investment is impacting financial numbers, right? So, we have also posted this on our website. It was part of Dave’s talk as well. So, in 2014, you find that the entire stack – the red bar is “operate” and the beige bar is “build.”, and we spent a lot of money on operate and a small amount on build. Then, we said we needed to step up our capabilities, so we stepped up the spend in “build” from 2015 to 2017. But the spend in the “operate” layer has been coming down over time, so that total tech spend has been kept flat. 

So, the overall technology cost hasn’t gone up. It’s still about a billion a year, but the mix has changed from operating to build because it’s cheaper to operate now. Over time, we’ve been reducing the cost to operate, and therefore, we’ve freed up capacity to be able to build a lot of these new capabilities.

ED:      Now, in the metrics that you have, what is the customer getting here?

CS:       The customer gets the joyful experience.

ED:      Why doesn’t the customer get a cost savings, a better rate?

CS:      If you look at some of the data points that we show, when the customers like your product, you get escalation in the usage. So, just for example, people are so delighted with this remittance product that we have –

ED:      That’s the customer using you –

CS:      Yes, the customer using you.

ED:      But banking is a licenced business. So, the customer has no choice between you and five other banks.

CS:      They can use us, compared to other banks and payment providers. So, you see this chart? In cross-border payments in 2014, we only had 2.2 million transactions in total across digital and traditional channels. Now, we are at 6.4 million transactions in total. So, this is the escalation over this period, and we are able to do this across 150 locations or 150 corridors. It is free of charge from all the markets we are in, plus the US, plus the Eurozone, and people tell us that it’s the most competitive FX rates.

ED:      So, the cross-border digital payments, it’s good to see that it’s gone up from 1.7 million transactions in 2014 to 6.1 million in 2017.–

RS:      And fee-free.

BP:      So, there’s no fee to the customer, but you earn on it, right?

CS:      Yes. But FX, we are the most competitive.

BP:      So, you’re more efficient.

ED:      But is the FX transparent to the customer?

CS:      Yeah, when you say you want to send the money, like Raghu sends money back to India, you know the rate you are contracting at. It’s very easy.

ED:      So, that’s the kind of metrics I’m looking for, what the customer gets. So, you’re the biggest mortgage business here, so –

CS:      People tell us it’s wonderful. They don’t have to leave their home. They can send money instantly.

ED:      That’s the convenience part.

CS:      Yeah, it’s the convenience part.

ED:      But the cheaper, more transparent, and more cost efficient – it’s not just convenience. Convenience is what all the banks in Singapore have to work at because it’s been terrible up until now. It still is in a lot of ways. You can’t upload your ERP card unless you go to a device. It’s like, “Why can’t I do it over the phone?” That kind of thing is really bad. So, just by improving certain things, you see the transaction numbers go up like crazy.

So, now, the thing is: What does the customer get in reality, and why is that not one of the metrics that you monitor for yourself? So, what are we are giving back to the customers? How much in savings? How much in benefit?

CS:      I think the benefit is really the proven use of the products that we give to the customer. As they use more and more of the products, that’s how they actually benefit. We think this is a good measurement.

ED:      You’re thinking like a licenced business. So, the customer should be grateful to you that –

CS:      No, they can go to other providers. There are many providers which are non-banks. There are a lot of providers out there. Everybody’s in a payment space.

ED:      So, payment space needs a story by itself, which is: Who is disintermediating whom? Banks are coming back late to win the market share, which is good. You have a beholden customer base because of the depositors, so all that is good, but how much of it is really disintermediation, and how much of it is transformational?

CS:      Let me give you an example. IDEAL is our cash management system for the small and medium customers, and we find a lot of them don’t sign up because of some fees that they don’t want to incur. So, they’d rather come and give you checks, etc. So, we did this experiment; we waived the fees, which was about $7 million per annum.  The outcome? The customers signed up because they have no fixed fee to worry about. They just have to pay the variable fee. And the volumes went up, and they more than made up for the seven million. So, I think customers kind of have more trust in the system when they don’t have to pay a fixed fee, so we go according to what we think the customer would like, and we believe in our product capabilities, and so it’s been proven in that sense. That adds real value to the customer, right?

ED:      That’s a good example.

What do you mean by end-to-end P&L? Give me an illustration.

CS:      The reason why finance is very heavily involved is because I can reconcile numbers to my general ledger, so I won’t have a number that I can’t explain. I have an ROE. I have a cost-to-income ratio. Everything is reconciled through my financial statements. So, I can break it up by SME, I can break it up by CBG, I can break it up by many segments, but they all add up. So, it includes all costs: direct costs, directly supporting costs, enterprise costs. Everything is computed and loaded, so I can tie everything to my announced P&L.

BP:      Down to the customer level?

CS:      Down to the customer level, based on these segments that we disclosed - you should take a look at the last page of my presentation. Wes showed the data for 2015. 2016. 2017. We showed number of customers. We have income. We have cost. We have profit before allowances. All these will tie back to published figures. You can take digital profit and divide by the total profit before allowance, and it’s meaningful. It’s not like I have a spreadsheet somewhere else to explain differences. It’s all very transparent.

ED:      Internally, there are two things that should happen to you the more digital you become. Number one is that you should have less staff, fewer employees, and number two is that they should be organised differently. So, what’s happening on that front?

CS:      If you look at our performance summary, you’ll find that our staff numbers have come down. Our numbers are coming down, and part of the reason is call centre olumes have come down by 21% since 2014. We need fewer people.

CS:      Headcount is now, excluding ANZ, excluding the insourcing staff, we are at 21,832, but a year ago, it was about 21,689, [and two years ago, we were at 21,996.] Of course, we continue to invest in growth areas such as wealth business.

ED:      So, is there a target for headcount, and is there a target for cost-to-income ratio as well? Are you working towards targets?

CS:      We indicated that if we’re able to shift more from digital to traditional, we think we can get about half a % point decline in cost to income ratio at the group level every year because that number is quite sticky. And some of the enterprises cost, like smaller call centres and smaller branches, will take time to make adjustments.

CS:      So, today we’re at 43, so we’ll say maybe 42.5 next year on same underlying.

BP:      Okay, your cost-to-income ratio will go down.

CS:      Barring big swings in certain items in the institutional banking world, we should see that. But we prefer that analysts track the cost-to-income ratio of this particular 44% revenue segment. It’s been going down from 49 to 44 to 43. So, this is the consumer and SME, Singapore and Hong Kong business. So, in 2015, it was 49 %. It’s now 43 %. So, it’s easier to track this number, and [the delta in cost to income ratio of digital versus traditional].  Before getting into “So, what does it mean for your overall group numbers?”

BP:      And as you become more digitalised with a lot of automation, there is impact on two fronts. On the front line, you won’t need as many people to service your customers because they’re moving their transactions off to digital channels, and your back office also, as they become more automated, they’re more straight through –

CS:      You see that in the reduction in numbers.

BP:      Yeah, in your numbers, but globally, banks are reducing staff. Are you in a position to do so, but not willing to because of other reasons?

CS:      So far, it’s been natural attrition. We moved at a pace where our people are re-skilled, so we are not doing anything specific–

BP:      Yeah, but we’re looking at where the numbers are huge, internally, in the thousands where you can’t re-skill them, and the new positions anyway are not skills that you can retrain to, like analytic data science.

ED:      Also, you’ll be buying services from your partners. Your APIs and so on will be taking some of that load away from you. And your technology team, for example, you’ll be open-sourcing a lot of your front end technology.

CS:      So, internally, we track to a deeper set of metrics, but externally, we think that we are already opening up quite a lot so that people can see and have the transparency. Without opening this up, you actually can’t see the improvement. You get a lot of noise effects from overall 43% –

ED:      The factors that I wanted to clarify here is there any double-accounting?

CS:      Double-accounting?

ED:      That means that with your 50% considered digital, there’s an opportunity for you to describe both your traditional business and your digital business on the same terms, so you’re actually describing it twice somewhere.

CS:      Describing it twice?

ED:      There is a way to do that.

RS:      So, if a customer is counted as D, he cannot be counted as T.

ED:      You can say that to me, but when you say 50%, it’s being very generous because it’s marginal.

SC:      No, 50% is a qualifying criterion.

CS:      We have done the checks, and we said that even if we move it to 70 % or 75 %, it makes no difference to the digital behaviours. We showed you a chart that had the number of transactions.

ED:      Yeah, you’ve already explained that.

CS:      I think it’s 16 times for consumer versus 6 times for SMEs.

SC:      16 times and 6 times.

CS:      This chart shows that both digital and traditional customers use online and offline channels. The digital customer and traditional customer carry out roughly the same number of transactions using offline channels like branches and call centres. But a consumer digital customer carries out 16 times more transactions than a traditional customer using online channels. So, whether you use 50% or 75% to qualify a digital customer, it doesn’t matter. If we look from this data point, we know that it doesn’t matter.

ED:      So, these are transactions?

CS:      Transactions.

ED:      The products that customers buy, which are wealth management or mortgages and so on, that’s where the engagement is and that’s where it gets logged into your balance sheet. So, I’m trying to figure out what should be the measure. The fact that someone makes transactions or there’s a churn in the relationship is one part of the story. The other part of the story is what’s actually on the balance sheet. In other words, when I get a mortgage from you, I locked the mortgage. It’s done, so it’s on your balance sheet already. The fact that I check my account ten times a day is neither here nor there.

CS:      The fact that you check your account ten times a day shows you’re actually quite engaged and you actually do more. That’s what we have shown as well. You actually do more –

ED:      If that’s the case, then I have to ask what the more is.

CS:      Then, the overall income should go up. The overall income goes up. [As we show in our slides, digital customers’ higher engagement with us is across all products, including loans and deposits which drive net interest income, and so it is not only fee income that goes up.]

ED:      Correct. So, as a rule of thumb, I do use fee income, and I say, “Okay, where are you in fee income?” and so on. And also, your products themselves must be fee-generating. In other words, it’s not a NIM product, for example. So, those things, eventually, we start measuring. In one year’s time, when I come back to talk to you, I may have developed a couple of ideas about that.

That’s the first, and then the second is: What are the goals that you want to achieve? It’s not just telling a story to the analysts. What journey are you measuring? I want to know that. So far, you’ve been, in my view, very conservative in that you’re actually measuring what you’re already doing. A transformational journey is something completely different, which is if you said, “I don’t want any more branches, and I only want digital from now on.” That’s transformational.

CS:      So, we made the decision for India. In India, you don’t have a choice. If you want to have checks and all of that, we are not the bank for you. We only do 100 % digital. In Singapore and Hong Kong, where we have a legacy business, we are providing options for everybody.

ED:      I understand.

CS:      So, the transformation that you see is the technology transformation that I told you about, 2009 to 2014. We overhauled all of our back-office systems. We introduced a layer so that, today, all our systems are already in the end state. Then, we moved to a cloud platform. So, there’s our first transformation, a technology transformation.

The second transformation that we are on is a customer journey-thinking transformation. All our products – and I hope you’re users of our products – whether it’s iWealth, Remit, Paylah!, are actually designed very differently from the past. The way we designed them is different - we have scrum meetings, people come together to collaborate…

BP:      The whole Agile model.

CS:      People walk through the journey. If you talk to people, they’ll often tell you about the four Ds. You discover. You define. You develop. You deploy. And you roll out cadence every ten weeks. So, the journey-thinking is, “I’m thinking on behalf of the customer. I’m the customer. I’m thinking how to solve the customer’s problem.” So, there is transformational thinking. Journey thinking is big.

And finally, it is culture change. We want to create a 22,000 start up bank, and that is not a few people doing it. Its 22,000 people, all having this culture change and mindset and that is what we actually do.

ED:      I understand.

CS:      So, that, to me, is the digital-transformation journey that we are on, and the whole thing is making banking joyful. That is what we –

ED:      That’s what is achievable for now, for banking in general, but really transformational is totally different, but that is okay. It’s good. It’s fine. So far, so good.

And the third is: What are your different stakeholders getting? And the one stakeholder that’s always missing seems to be the customer. And it’s not you getting what from the customer; it’s what the customer is getting as a value. And you did explain the remittance product, for example, and no fees, and stuff like that. That’s good.

CS:      I think you’ll find that with the mortgage product, we’re the most competitive. We’ve just crossed the 30% market share.

ED:      Mortgage is very interesting. For example, you can say that you’re digital. At the end of the day, you win market share because you fight on rates. That’s going back to sticks and stones, and I’m not impressed when that happens, by the way. So, are you truly able to win customers because you’re digital?

CS:      I guess there’s always a bit of cause and effect. It’s probably both. You have to offer attractive rates, and you also have to have a product that is easy for the customer.

ED:      So, maybe it’s Singapore, maybe its general banking, but there will come a time where, because you’re digital, you are more competitive. Right now, for your core products like mortgage and even your GTS products, at the end of the day, it’s rates. The customer is like that and you are like that too. So, if because of digital, you got market share over the other two banks or whatever –

CS:      It’s not true. It has a lot to do with capability. When we say GTS, we show, on this slide,Grab. So, because we are able to pay the Grab driver on the spot, he knows on the spot he gets a credit. He doesn’t wait until, a few days later, his company pays him. We work on that. That is our value proposition. All the funds, therefore, come to us. It’s got nothing to do with rates. It’s actually a capability that we have within GTS.

The other case we featured was MSIG. MSIG, we were able to enhance and ease the payments for policyholders. That’s what we call a GTS capability. We are not talking about cash balances per se.

We gained Maerskas a customer. There is no existing relationship. But because of the capability we’re able to offer, which no other banks could give to them, they came to us. So, today, we co-create the solution. This is the GTS product. It has nothing to do with rates.

This is a slide that was featured in a presentation given by John Laurens. It’s there. So, you must see the whole presentation as an entire stack. So, there was Piyush’s presentation. There was Dave’s presentation. There was my presentation. There was Surojit’s presentation and what happens in India. And then, because of the rest of the business, it’s not so easy to show the metric. John Laurens gave the business examples of how GTS digitised the business. It has nothing to do with rates. And finally, Su Shan did the private banking presentation on wealth management products. So, there were six presentations –

SC:      And Jimmy talked about Audit.

CS:      Oh, there was Jimmy and Audit as well. So, it’s a full spectrum. It’s not one part of the bank that’s digitalizing. The methodology is easier to communicate for the digital business that we talked about, and people can see the linkage of digital to results. So, for the rest, it is harder to see the linkage.  For growth markets, it will take time.

ED:      Thank you very much.

CS:      No, we’re happy to take you through more examples.

ED:      No, I really appreciate this. The thing is that this is a continuing conversation. We are looking for truly transformational. It’s very judgmental because, generally, the average bank is doing a journey, but at the same time, if your first premise is wrong, then I would tell you. So far, you’re doing what you should be doing as a commercial bank. But when you do a rates war in the newspapers, that’s really not impressive at all.

CS:      No, it’s part of the overall business strategy. I don’t think we should say our digital strategy is different from our balance sheet strategy.

BP:      On the point of the customers, in terms of now you have a whole lot of data about customers, and you’re talking about competing on rates, to what extent are you able to personalise or customise rates today, understanding the customer risk and understanding the customer’s transaction behaviour?

ED:      Yeah, what are you doing on the customer level, right down to the customer –?

CS:      Today, we can do big data. We can actually gate some of the customers up-front. I guess a mortgage product is still a mortgage product, but if you have other products with us, I suppose you can get a slightly better rate, because we look at your overall total products that you take with us.

Artificial intelligence enables us to gate our customers a lot better. You can tell which customers might be sensitive to rising rates. Today, they have a package that maybe the rates are a bit on the higher side, and they have taken a product based on SIBOR, so you can actually offer them a product and say, “If you take an alternative product, you actually can lower your cost of funds,” so they do come to talk to us.

ED:      I would say another element that I would like to see you measure is granulising customers. Instead of plain vanilla, maybe you say you have seven different types of customers or something like that.

CS:      So, today, this is as granular as we can get. You go down to digital behaviour at the customer level. So, we are investing in that capability to know the customer better.

CS:      We’re just building an ecosystem so that all our primary school students – I think we’ve done it in 30 schools already. So, they’re very responsive.

BP:      And the parents get to top upand see what they are spending –

CS:      Yeah, the parents know what the kids spend on in the canteen, whether they bought chicken rice or they bought –

ED:      In Australia, also, they’re doing it.

CS:      And then, the parents said, “Well, I don’t want my kids to be wearing a watch, plus wearing a Fitbit tracker,” so we built all that in. So, the wearable comes with a watch feature. It comes with a GPS.

ED:      No, the problem in Singapore is that then your bank starts it, but it’s very limited to your customers or something like that.

CS:      No, it’s open to all. All students can sign up. It’s done by the school. Whoever wants to sign up can sign up.

            And because we have a GPS built in, the parents say, “Oh, I want to know where my kid” –

BP:     kids are.

CS:     “goes onto a bus, when the kid reaches school.” All those can be automated. So, you see us building ecosystems, helping customers with their pain points. “Why don’t we build an ecosystem where we can help tenants and landlords? The landlord and tenants can keep track of the tenancy agreement. We can populate the tax returns as well.” So, we do this additional stuff to take away people’s pain points, and then we do giro servicing for the tenants to pay the landlord, etc.

So, we are coming out with a lot of these ideas to build bigger ecosystems to benefit the customers.

ED:      And learn at the same time. So, they’re fine. Thanks for bringing it up. Thank you very much. It’s a continuing conversation.

CS:      Thank you. We’re happy to share our journey.

Keywords: Digital Transformation, Technology, Transaction Banking, Retail Banking, 3 Hong Kong
Institutions: DBS
Country: Singapore
Region: Asia Pacific
People : Chng Sok Hui, Emmanuel Daniel, Foo Boon Ping, Siddharth Chandani, Raghu Singh
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